The UK financial watchdog has warned that car buyers are being overcharged by more than £1,000 when they take out a loan because of excessively high commission payments.
The Financial Conduct Authority (FCA) says that it is considering changes to the way in which commission works in the motor finance market after uncovering “serious concerns” about the way lenders are choosing to reward car retailers and other credit brokers.
It found that the widespread use of sales commission models, which allow brokers to set the customer interest rate, could be costing consumers £300 million annually overall.
The FCA estimates that on a typical motor finance agreement of £10,000, higher broker commission can result in the customer paying around £1,100 more in interest charges over the four-year term of the agreement.
The regulator says that commission model can lead to conflicts of interest which are not controlled adequately by lenders, with customers paying “significantly more” for their motor finance.
Jonathan Davidson, the FCA’s director of supervision, says: “We found that some motor dealers are overcharging unsuspecting customers over a thousand pounds in interest charges in order to obtain bigger commission payouts for themselves.
"We estimate this could be costing consumers £300 million annually. This is unacceptable and we will act to address harm caused by this business model.
“We also have concerns that firms may be failing to meet their existing obligations in relation to pre-contract disclosure and explanations, and affordability assessments. This is simply not good enough and we expect firms to review their operations to address our concerns.”
However, the Finance and Leasing Association, the trade body for the motor finance sector, says the FCA's findings are based largely on out-of-date information and do "not reflect the very considerable progress the market has already made in moving away from such structures.”
Options to act available to the FCA include strengthening existing rules or other steps, such as banning certain types of commission model, or limiting broker discretion.
The FCA also has also been carrying out mystery shopping of firms and found that many dealers were not giving customers enough information to make informed decisions.
It says it is also not satisfied that all lenders were complying with the rules on assessing creditworthiness, including affordability.
The FCA says it will follow up with individual firms where failures were identified.
It expects all firms, both lenders and brokers, to review their policies, procedures and controls to ensure they are complying with all relevant regulatory requirements and are treating customers fairly.
What should you do if you think you have been overcharged?
If unhappy with your credit agreement you should contact the dealer/lender you took it out with.
If you are still not happy and wish to escalate your complaint you should then contact the Financial Ombudsman Service.
James Fairclough, CEO at AA Cars, says: “The best thing consumers can do before seeking out car finance is arm themselves with as much information as possible.
“There are also online portals, such as our own, that allow customers to carry out ‘soft’ credit checks to see what products they are eligible for without leaving a mark on their credit report, as well as providing a simple breakdown of costs over the course of the term - meaning they aren’t caught out by any surprise fees.”